1.) Create a portfolio using the two stocks and information below: (Do not round
ID: 2811502 • Letter: 1
Question
1.) Create a portfolio using the two stocks and information below:
(Do not round intermediate calculations. Record your answers in decimal form and round your answers to 4 decimal places. Ex. x.xxxx)
a. What is the variance of A?
b. What is the variance of B?
c. What is the Correlation (A,A)?
d. What is the Correlation (B,B)?
e. What is the Covariance (A,A)?
f. What is the Covariance (A,B)?
g. What is the Covariance (B,A)?
h. What is the Covariance (B,B)?
i. What is the expected return on the portfolio above?
j. What is the variance on the portfolio above?
k. What is the standard deviation on the portfolio above?
Expected Return Standard Deviation Weight in Portfolio Stock A 26.00% 35.00% 16.00% Stock B 7.00% 26.00% 84.00% ---------------------- ---------------------- ---------------------- ---------------------- Correlation (A,B) 0.0100 ---------------------- ----------------------Explanation / Answer
A. Standard deviation = root over of variance
variance of A = standard deviation of A^2
= 0.35^2
= 12.25 %
B. variance of B = 0.26^2 = 6.76%
C. a correlation of A with A is 1 . coorelation with oneself is always 1 .
D. correlation of B with B is 1.
E. coorelation = covariance of A with A / standard deviation A ^2
= covariance of A with A = standard deviation of A ^2
as covariance of A with A = correlation of A with A / STANDARD DEVIATION OF A^2
=0.1215
F. correlation of A with B = covariance of A with B / standard deviation of A* standard deviation of B
0.01 = covariance of A with B / 0.35 * 0.26
=0.0009
G. covariance of B with A is also 0.0009
H. Covariance of (B,B) = standard deviation of B^2 = 0.0676
I. expected return on the portfolio
weight of A * return of A + weight of B * return of B
=0.16 *0.26 + 0.84 *0.07
=0.0416 + 0.0588
=10.04%
J. variance = weight of A ^2 * standard deviation of A ^2 + weight of B * standard deviation of B ^2 + 2 * weight of A * weight of B * covariance of A and B .
= 0.16^2 *0.35^2 + 0.84^2 *0.26^2 + 2* 0.16*0.84 *0.01 *0.35*0.26
= 0.0031 + 0.0477 + 0.0002
=0.0510
K. standard deviation = root over of variance
=0.2258 ( root over of 0.0510)
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